Spider-Man no superhero for Hasbro?

HerbGreenberg

This column first appeared in the weekend edition of The Wall Street Journal.

SAN DIEGO (MarketWatch) - "Spider-Man 3" broke box-office records on its May 4 opening weekend. In the toy aisles, the publicity surrounding success at the box office may not be luring as many customers as expected.

The biggest hit from any "Spider-Man 3" toy-sales shortfall would be felt by Hasbro
HAS, -1.07%
which holds the master toy license not just for "Spider-Man 3," but also, under a five-year deal, the broad portfolio of superhero characters owned by Marvel Entertainment Inc.
MVL, -2.72%
Still, Marvel could feel the ripple effect eventually, too. "It has been hard to predict how a toy based on a movie will do over the past 10 years," says BMO Capital Markets analyst Gerrick Johnson. "It used to be, in the good old days, it would be a guaranteed home run. Now there are so many movies, so crammed together, there's just a limited shelf life."

Johnson is one of several analysts warning clients of possibly disappointing "Spider-Man 3" toy sales. His first clue: seeing neat shelves of Spider-Man toys at Wal-Mart stores. If the toys were selling well, he figures, the shelves would be a mess. Then Michael Savner of Banc of America Securities wrote in a recent report to clients that he had heard of lower-than-expected sales from "contacts" at several unnamed "major big-box retailers." The information, he says, was corroborated by NPD Group, the market-research firm. Dean Gianoukos of J.P. Morgan Chase took it a step further, telling his clients that discussions with 40 toy-department managers at Wal-Mart Stores Inc.
WMT, -0.75%
showed that "Spider-Man 3" toy sales were "OK," but that only 20% of the managers said they planned to reorder. Wal-Mart is the biggest retailer in the U.S. It declined to comment. Target Corp.
TGT, -0.71%
the No. 2 retailer, said "Spider-Man 3" toys are "meeting our expectations."

The toy department of the "Spider-Man 3" franchise was supposed to be a big winner. The opening weekend of "Spider-Man 3" grossed more than any movie ever, and the movie has been breaking box-office records world-wide, with a global gross as of June 13 of $865 million, according to Web site Box Office Mojo. Despite a sharp falloff in attendance since the opening weekend -- itself perhaps an indicator of the public's fleeting interest -- it may wind up as one of the top-grossing movies to date. And it is just one of several coming Marvel-based movies feeding Hasbro toys, including this weekend's release of "Fantastic Four: Rise of the Silver Surfer."

Hasbro officials declined to comment. In April, in a conference call to discuss first-quarter earnings, Hasbro Chief Executive Al Verrecchia said that "Spider-Man 3" was off "to a great start," with sales since the late-March launch of the toys (before the movie's opening) "significantly" ahead of the comparable period before "Spider-Man 2" opened in 2004.

Like all toy makers, Hasbro garners its profit from shipments to retailers, not what retailers sell. Still, the better the retail sales, the better future shipments. The strength of shipments in the second half of this year "depends on how strong the movie is, and how well the product does after that," Verrecchia explained. He added: "Hopefully, the first-half shipments are real low, compared to the full year. But that will depend on the strength of the movie," including DVD sales, which have yet to start.

The risk for Hasbro, Johnson says, is the deal it struck with Marvel: That is because Hasbro agreed to pay a minimum royalty guarantee of $215 million over five years, including an initial payment of $100 million. Sales that don't reach levels to justify that minimum payment, he says, could cut into earnings.

While the money paid to Marvel is viewed as nonrefundable, Marvel isn't entirely off the hook. According to Savner, Marvel's earnings forecasts assume the company will receive far more than it has received in guarantees. "By getting such big guarantees, it has a high hurdle going forward," Savner says.

Marvel, which recently began making movies on its own, declined to comment. It had better pay attention -- and not just because a good percentage of its overall revenue comes from licensing fees on toys. With any toy line, Johnson says, it is sales of a product line's accessories that fall first. "They're the canary in the coal mine," Johnson says. Extend that to the entertainment world, he says, and toys could be viewed as the accessories to movies. As movies keep rolling off the assembly line, Marvel investors may want to keep that in mind.

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